Worker Misclassification – A Pandora’s Box

Worker misclassification continues to be an ongoing problem throughout the country.  The effect of this has its greatest impact on low wage earners.  By virtue of being misclassified as independent contractors, as opposed to employees, such workers do not have legal protections of employees, such as minimum wage and overtime protection or unemployment and worker’s compensation coverage.  Further complicating matters is that determining whether a worker is an employee or an independent contractor requires a very fact specific analysis and consideration of many factors.

For tax purposes, the IRS determines whether a worker is an employee or an independent contractor by analyzing the degree of control the entity has over the worker and whether the worker is providing services independently. Generally, the considerations are behavioral, financial and contingent on the type of relationship between the worker and the entity (i.e., is there a written contract? Is the worker provided employment type benefits?).  The IRS suggests companies “look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”

If companies have a concern regarding classification for tax purposes, they can consult with the IRS.  The business or the worker can submit a “Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding,” which allows the IRS to review the circumstances and make a formal determination on worker status.  The IRS does warn that a determination could take at least six months.  Another alternative is for the entity to participate in the Voluntary Classification Settlement Program, which provides entities with the opportunity to reclassify their workers correctly for future tax periods and allows for partial relief from federal employment taxes.  In any event, entities should proceed cautiously as intentional misclassification and tax violations can be reported to the Florida Department of Revenue anonymously.

Unlike the IRS analysis, employment law analysis under the Fair Labor Standards Act focuses on the economic realities of the relationship, i.e., whether a worker is economically dependent on the alleged employer.   Because of the magnitude of the misclassification problem, the Department of Labor can bring enforcement actions for minimum wage or overtime violations against those employers that it determines have misclassified its workers.  Individuals who believe they were misclassified can also pursue a private right of action, individually or on a collective basis, for wage violations.  Employers may be liable for liquidated damages, as well as back pay and attorney’s fees.

Finally, for both unemployment compensation and worker’s compensation purposes, in Florida, a common law 10 factor approach is used to determine whether the worker is an employee or an independent contractor.   The factors are as follows:

  • The extent of control the business exercises over the details of the work.
  • Whether the worker is engaged in a distinct occupation or business.
  • Whether the work is performed in a certain locality and is done under the direction of the business or by a specialist without supervision.
  • The skill required for a particular occupation.
  • Whether the business or the worker provides the instrumentalities (i.e., equipment, tools, materials, etc.) and/or the place for the worker doing the work.
  • The length of time the person is providing services.
  • The method of payment (by time or by job).
  • Whether the work is part of the regular business of the employer.
  • Whether the parties themselves believe they are creating an employer/employee relationship.
  • Whether the hiring party is or is not a business.

The Florida Division of Workman’s Compensation (the “Division”) investigators routinely conduct on the job inspections to determine compliance with workman’s compensation laws. The Division takes civil enforcement action against those businesses operating without the requisite coverage.  In the event of a determination of a misclassification, the likely result is a Stop Work Order, essentially stopping all business operations until the business complies with the law and pays penalties, as appropriate, with the penalty usually being two times the amount the employer would have paid in premiums for those misclassified employees within the preceding two year period.  Businesses may also be penalized for failing to secure worker’s compensation coverage for each employee misclassified by the employer as an independent contractor.  Penalties are assessed based on the number of misclassified workers – $2,500 per worker for the first two misclassified worker per site and $5,000 per worker after the first two misclassified worker per site.

Incorrect classification further impacts claims for reemployment assistance benefits.  If a worker files a claim for reemployment assistance benefits but the business did not report the worker, the Department of Revenue will investigate the relationship between the worker and the business.  Both the business and the worker will be required to submit an Independent Contractor Analysis form, which the Department reviews for purposes of issuing a determination. Determinations can be appealed to the Department of Economic Opportunity.

Proper classification of workers is critical.  Misclassification can cripple a business, financially and/or in their ability to do business at all.

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